Abstract

Blockchain technology offers the potential to transform economic activity and improve living standards in Africa by overcoming information asymmetry problems, property rights and governance barriers. Blockchain innovations have the ability to boost levels of productivity and unlock capital flows to underserved sectors, in addition to leveraging the increasing returns of information as an input to production in order to spur economic growth. This background paper discusses the recent advances in blockchain technology within Africa, and investigates the underlying economic principles of blockchain networks, both universally and in an African context. It reviews the enabling infrastructure and supporting technology, including digital identity. Finally, it gives policy recommendations to increase the uptake of blockchain technology on the continent.Keywords: blockchain, data governance, Africa.

Blockchain is a relatively new technology that has seen rapid global growth since its first commercial implementation in 2008. A blockchain is a digital ledger of transactions that is duplicated and distributed across an entire network of computer nodes. Each entry in the ledger is known as a block, and the addition of new entries is done by appending a new block to the existing set of blocks, resulting in a chain of blocks. Each block in the chain contains a number of transactions, and every time a new transaction occurs, a record of that transaction is added to every participant’s ledger. The nodes within a blockchain network may be anonymous and therefore untrusted across the participants. Therefore, mechanisms such as proof of work or proof of stake are implemented to establish trust amongst the network’s participants so that there is no need for a central trusted authority or clearinghouse within the network. These mechanisms work by introducing costs that discourage malicious behavior amongst network nodes.

Africa’s blockchain footprint is small and accounts for a small portion of the global blockchain network. For example, if the Bitcoin network is considered, there are 12,867 nodes globally, of which only 16 nodes are in Africa, representing less than 1 percent of the total. The distribution of nodes is across South Africa, which accounts for 14 nodes, and Nigeria and Egypt, which each account for one node.Footnote6 The largest share of Bitcoin nodes is found in Europe, which has a total of 4258 nodes.

While there has been significant growth in blockchain adoption, there is great latent potential in a number of areas related to governance and transparency. While the benefits of deploying blockchain technology are clear, the implementation of solutions has been slow and fragmented. In the area of public spending and governance, blockchain-based workflow tools allow for efficient project implementation by enabling expenditure tracking in a collaborative and transparent way. The deployment of blockchain technology has also increased the transparency of property rights and transfers of asset ownership, particularly related to land registration. This addresses challenges in many developing countries, where a large share of land owners lack accurate documentation of property ownership. Additionally, in order to increase trust in educational certificates, blockchain-based systems are being deployed for the verification of digital documents. This helps to establish trust in labor markets.

Blockchain research is still nascent, and the economic theory of blockchain networks is far from well established. Additional research on blockchain economics is necessary to contribute to the growing literature. These papers will incorporate an element of computer network dynamics from computer science as a matter of necessity, in terms of the efficiency, technical capacity, and deficiencies inherent in networks of anonymous users. In addition, the literature will continue to explore new economic incentives that arise out of interactions within distributed networks. For example, while blockchain networks solve the problem of establishing trust within distributed networks and maintaining accurate data within those networks, it does so at the expense of generating costly verification. While alternatives to costly verification are under experimentation, there is no clear solution, and this remains an active area of research.